An endowment policy is a life insurance contract designed to pay a lump sum after a specified term or on earlier death .Endowment insurance policies differ from other insurance policies, by its unique nature of enjoying monetary benefits during life time. Unlike other policies, which provides financial security for the dependants of the insured, the main objective of an endowment policy lies in offering monetary benefits during the life term of the individual.. Life insurance protection comes only after that. Therefore, it is more of an investment than a whole life policy. Endowment life insurance pays the face value of the policy either at the insured's death or at a certain age or after a number of years of premium payment.
There are several options for paying the face value of the insurance policy. They can be paid on the death of the insured like any other insurance policy. Other choices include paying them on the attainment of a certain age or after the successful payment of policy premiums. This type of insurance is recommended if you want to save some money for meeting a Particular purpose like funding your child's study in a university. The life insurance cover of endowment policies entitles your dependents to obtain the policy amount in case of your death.
Types of Endowment
The three different types of endowment insurance policies are as follows
- With-profit
- Unit-linked
- Low-cost
With Profit
In this type of insurance policy the insurer chooses a combination of options to invest your premiums. Some of them will be invested in financial instruments like shares, debentures and fixed deposits schemes of commercial banks while the others will be invested in purchasing an asset and the like. The premium amount of an endowment insurance policies are at par with life insurance price.
You can claim a particular amount from the policy if they have met the minimum premium conditions. Incase your premiums perform well in the market (in the form of investment) the surplus amount will be accumulated to your policy and thereby increases its face value. This amount cannot be altered after it is declared to add them. These additions can come in handy to save or at least reduce your loss in the event of created due to fluctuations in the stock market provided the money is invested in the stock market.
This policy is losing its popularity due to the facilities given by the next category namely unit linked. This policy provides better return that with profit policy. Under this policy the policy amount is to be utilized after the death of the insured. As per this policy the profits that come by way of the insured's investment is converted into units of the investments. The number of additional units and the extent to which they increase the profits are also brought to your knowledge.
If the insurer succeeds in paying all the premiums without any fail the company also credits the insurers account with additional benefits. These benefits can at times be very high depending on your policy duration. In case of policies that have a very high duration the additional amount is substantial and equals a big portion of the policy amount itself.
Unit-Linked Endowments
Under this policy the insurer allocates the premiums into various units. The insured is also given the opportunity of choosing the option of investment units. Most of them prefer to distribute them in financial investments and assets. The number of units they choose on each option lies differs from individual to individual. Some of them may choose to invest more on properties while the rest prefer to invest more on financial instruments.
Similarly the insurer takes care to allocate a unit of the premium for insurance maintenance and the ancillary expenses. The insured will have no choice over this. The insured is also exempt from paying income tax for the amount received from the company. However this policy does not guarantee profits like the previous one and is hence risky as far as returns are concerned.
Low cost endowment (LCE)
A low cost endowment is a combination of: an endowment where an estimated future growth rate will meet a target amount and a decreasing life insurance element to ensure that the target amount will be paid out as a minimum if death occurs (or a critical illness is diagnosed if included).
The main purpose of a low cost endowment has been for endowment mortgages to pay off interest only mortgage at maturity or earlier death in favour of full endowment with the required premium would be much higher.
